prev

Obama Bucks

“If making money is a slow process, losing it is quickly done.”

-Saikaku Ihara

 

That’s a mint quote at the start of chapter 13 (“Wild Money And The Stealth Tax”) in one of my favorite economic history books, Jack Weatherford’s The History of Money (pg 193). I’d love to hear Bernanke and Obama’s version of this history. Devaluing the purchasing power of The People for political gain is as old as politics itself. It’s called inflation – and it’s a stealth tax.

 

Ex the anti-dog-eat-dog-class-warfare-storytelling, you’ve probably noticed that US politicians are currently burning the credibility of your hard earned currency at the stake (see Chart of The Day). No US President and/or Federal Reserve Chief has overseen A) a lower US Dollar value and/or B) a higher Oil price than Obama and Bernanke. Nice job boys.

 

No US President has been forced to “shut-down” the government in 17 years either. In order to explain the mechanics of it all, we’ll be hosting a call with the last man to force Big Government’s hand on this, Newt Gingrich, at 11AM EST @Hedgeye today (email if you’d like access – we’ll have a full access client Q&A for Newt too).

 

Back to the Global Macro Grind

 

Simple question: When it comes to the purchasing power (currency) of who Obama labels “ordinary, middle class folks”, doesn’t the buck stop with the President of The United States?

 

As Obama pointed out yesterday in an interview with raging Republican, John Harwood, the appointment of Bernanke was as important as any he’s made. So, doesn’t that make The President accountable to empowering a Burning Buck policy?

 

Silly questions, I’m sure. That’s why CNBC didn’t get me to do the interview.

 

In other news, the US stock market is now down for 9 of 11 days since Ben Bernanke arbitrarily decided to do precisely the opposite of what he was “communicating” to the marketplace (taper).

 

Counter to consensus thinking, the better part of this recent correction in stocks has come on days when:

  1. US Dollar is DOWN, and
  2. US Interest Rates are DOWN

The causal factor in driving Down Dollar has been a two track (monetary and fiscal) political strategy that is starting to look like an idea that came out of a Roman bath club circa 52 BC. Plunder the people for political gain. They won’t understand. #stealth

 

With the US Dollar having given back all of its YTD gains (it’s down -2.7% in the last month):

  1. The US Dollar Index now has a 6-week POSITIVE correlation of +0.95 to the 10yr US Treasury Yield
  2. And the USD has a 6-week POSITIVE correlation of +0.82 to the US Treasury 10Y-2Y Yield Spread

Just because you won’t get things like leading indicators from your President or the US Federal Reserve doesn’t mean they cease to exist:

  1. Down Dollar and Down Interest Rates are starting to = Down Stock Market
  2. Down Dollar and Down Interest Rates = a leading indicator for #GrowthSlowing

If this sounds familiar to you, it should – this is basically the inverse of our call for the last 10 months. We were bullish on US GDP #GrowthAccelerating because two of the most obvious leading indicators for growth (#StrongDollar + #RatesRising) had both #OldWall Street and Washington consensus chasing the rising growth expectations.

 

From a S&P Sector perspective, the easiest way to summarize growth expectations slowing is via the Financials (XLF). The reason why the 10Y minus 2Y Yield Spread matters is because this is how a bank makes money. As the long-end of the curve (interest rates) falls, banks make less of a margin and can then lend less.  How’s that for “ordinary folks”?

 

While almost every said “economics” guru advising Obama will tell him that a “weak Dollar is good for manufacturing and exports”, that’s the biggest crock since Nero started devaluing The People’s currency in the first place. Let’s look at what just happened in a country whose currency was lit on fire earlier this year (and whose stock market was crashing, in kind) – Brazil:

  1. Brazil finally said enough is enough, and RAISED rates to defend its currency (the Real)
  2. Brazilian Real is now +7.8% in the last month versus USD; Brazilian Stocks (Bovespa)= +17.9% in the last 3 months
  3. Brazil’s SEP economic data (both manufacturing PMI and Exports) accelerated as its currency did (Exports +5% y/y SEP)

Yep. Them be the facts, “folks.” And if you want to re-gain the trust of The People, you better start talking #truth. Politically preying on the ignorance of “ordinary” people is un-American. Losing respect like the US Dollar has happens slowly, then all at once.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.58-2.73%

SPX 1

Nikkei 134

VIX 14.86-17.39

USD 79.21-80.42

Euro 1.34-1.36

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Obama Bucks - Chart of the Day

 

Obama Bucks - Virtual Portfolio


THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – October 3, 2013


As we look at today's setup for the S&P 500, the range is 15 points or 0.76% downside to 1681 and 0.13% upside to 1696.                                              

                                                                                 

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.32 from 2.30
  • VIX closed at 16.6 1 day percent change of 6.82%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts Y/y, Sept. (prior 56.5%)
  • 7:30am: RBC Consumer Outlook Index, Oct. (prior 51.1)
  • 8:30am: Init Jobless Claims, Sept. 28, est. 315k (pr 305k)
  • 8:30am: Continuing Claims, Sept. 20 (prior 2.800m)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 29 (prior -28.1)
  • 10am: ISM Non-Manuf Index, Sept., est. 57 (prior 58.6)
  • 10am: Freddie Mac mortgage rates
  • 11am: U.S. announces plans for 3Y note auction on Oct. 8, 10Y notes on Oct. 9, 30Y bonds on Oct. 10
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 11am: Fed’s Williams speaks in San Diego
  • 12:30pm: Fed’s Fisher speaks on economy in Dallas
  • 1pm: Fed’s Lockhart speaks on labor market in Atlanta
  • 1:30pm: Fed’s Powell speaks on banking in St. Louis
  • 5:30pm: Fed’s Fisher speaks in Little Rock, Ark.

GOVERNMENT:

    • Partial U.S. govt shutdown enters 3rd day
    • IMF’s Christine Lagarde speaks on global economy
    • SEC Commissioner Daniel Gallagher speaks about his agency at the Security Traders Association Market Structure Conf. 3:15pm

WHAT TO WATCH:

  • White House meeting fails to end stalemate that led to shutdown
  • Eco releases to include claims today, no payrolls tmw
  • Frustrated Republicans urge Boehner to find deal to end shutdown
  • Goldman said to make $1.5m error in Ford bond issue
  • U.S. holiday sales may rise 3.9% as budget fight curbs sentiment
  • Pershing’s Ackman moves to soften risk on Herbalife pyramid bet
  • Draghi said to task ECB panel to mull bank liquidity options
  • China services index rises to 6-month high
  • BP wins review of challenged payouts to Gulf spill victims
  • Google seen by U.S. risking security if data release is allowed
  • Mark Cuban to defend himself on stand in SEC’s insider trial
  • Spain sells 10-yr bonds to yield 4.269%, lowest since Sept. ’10
  • Google buys gesture recognition startup Flutter: AllTHingsD
  • Zale says Golden Gate Capital may sell 25% stake: WSJ
  • Eurozone Aug. retail sales up 0.7% M/m; est. up 0.2% M/m
  • United Technologies sees 5k jobs at jeopardy in U.S. shutdown

EARNINGS:

    • Constellation Brands (STZ) 7:30am, $0.88
    • International Speedway (ISCA) 7:30am, $(0.01)

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • Malaysia Starts Gold Futures Trade as Investor Demand Grows
  • Rio Replacing Train Drivers Paid Like U.S. Surgeons: Commodities
  • WTI Crude Declines on Concern U.S. Shutdown May Curb Fuel Demand
  • Gold Falls on Signs of Slowing Demand in China; Palladium Drops
  • Copper Declines as U.S. Government Shutdown Enters Third Day
  • Wheat Rises as Rain Slows Winter Planting From Ukraine to Russia
  • Sugar Falls in New York for First Time This Week; Cocoa Climbs
  • BHP Sees Robust Commodity Demand Growth as China Urbanizes
  • Iron Ore Exports From Port Hedland Climb as China Purchases More
  • World Food Prices Drop to Lowest in Three Years on Grain Slide
  • Saudi Aramco Set to Narrow Light-Heavy Price Spread: Asia Crude
  • Europe Faces Winter Gas Squeeze Even With Faster Stores Refill
  • Gold Double Bottom Signals Rally to $1,425: Technical Analysis
  • Russia’s VTB Capital May Expand in Base Metals Trading Next Year

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

GET TIGHT AND TRADE THE RANGES IN JAPAN

Takeaway: Investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M.

SUMMARY BULLETS:

 

  • From our vantage point, the following three scenarios are all probable, with each ascending scenario being roughly twice as probable as the previous one on the list:
    1. The SEP and/or OCT US employment and inflation data cause the Fed to commence tapering in 4Q13;
    2. Abe’s Third Arrow platform (TBD) is well-received by the market and/or the BoJ preemptively eases monetary policy in 4Q13; or
    3. Abe’s Third Arrow platform is not well-received by the market and the BoJ refrains from preemptively easing monetary policy in 4Q13.
  • The unique nature of each of the aforementioned scenarios is supportive of developing consternation that may contribute to rising levels of implied volatility on the USD/JPY cross and in the Japanese equity market.
  • While we certainly don’t see the Abenomics Trade as being a rearview phenomenon, we do think the unsettled nature of the catalyst calendar is likely to breed contempt in the marketplace and contribute to a widening of the associated immediate-term trading ranges on a go-forward basis.
  • Thus, investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M.

 

THE 30,000 FOOT VIEW

With the recent announcement that the +300bps VAT hike will proceed as scheduled come APR ‘14 and the accompanying ¥5T stimulus package now in the rearview mirror, the policy calendar in Japan becomes relatively light again.

 

The general lack of clear policy catalysts from Japan is important in the context of the developing US monetary policy situation – specifically, the Fed’s recent decision not to taper asset purchases in spite of a clear acceleration in US growth data.

 

On the margin, the aforementioned FOMC surprise was a decidedly dovish maneuver that has weighed on the US dollar (now bearish TREND) vis-à-vis the Japanese yen (the USD/JPY cross is flirting w/ a TREND-line breakdown).

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 1

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 2

 

Quantitatively speaking, what’s bullish for the Japanese yen in almost perfectly bearish for Japanese equities; the trailing 1Y and 3Y correlation between the USD/JPY cross and the Nikkei 225 Index is +0.97, respectively.

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 3

 

Perhaps more importantly, the Nikkei 225 Index remains underwater vs. it’s late-MAY YTD high and is down -6.4% since the USD/JPY cross peaked on MAY 17. The more that currency cross remains under pressure due to FOMC dogma(s), the greater the probability that market participants start to walk away from the Japanese equity reflation side of the trade.

 

IN THE WEEDS

The aforementioned playbook is something to keep in mind as you attempt to manage risk around the next couple of US Jobs Reports and any headlines surrounding Prime Minster Abe’s Third Arrow over the next 2-3M.

 

Regarding that latter point, we think any policies designed to facilitate wage increases, spur corporate CapEx and/or convince Japanese companies to believe in the sustainability of the weak yen will be most impactful as it relates to FX market participants bidding up the USD/JPY cross on [good] news:

 

  1. Wage growth remains anemic in Japan with growth in monthly cash earnings slowing to -0.6% YoY in AUG; the trailing 1Y and 3Y average growth rate is -0.4% and -0.3%, respectively.
  2. Despite the 3Q13 Tankan Survey results accelerating to the highest levels in over 5Y, the one major disappointment of the survey was the large enterprises CapEx guidance forecast slowing to +5.1% from +5.5% prior. That forecasted rate of fixed investment growth is well off prior peaks of +10-12%.
  3. We believe the primary reason Japanese multinationals are still reluctant to invest in Japan’s future is because they are not yet convinced of the sustainability of the weak yen. Per the latest Tankan Survey, the NTM forecast of Japan’s large enterprises for the USD/JPY cross is a measly 93.77. A measured shift in the direction of our ~18M view of ~125 on that cross will be highly supportive of Japanese corporations reversing the secular trend of off-shoring production and unwinding entrenched deflation expectations that have perpetually weighted on wage growth in Japan. To the former point, Japan’s overseas auto production grew +3.6% YoY in AUG, which contrasts with the -8.1% YoY decline of domestic auto production (the 12th straight month of declines).

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 4

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 5

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 6

 

As we have forecast all along, Japan’s policy prescription has done little more than contribute to rising inflation expectations in Japan, thereby adversely widening the spread between those very expectations and expectations for economic growth. The following two data points highlight this bifurcation:

 

  1. Results from a Nikkei survey released today showed that there are roughly ~4x more companies that are considering passing along the VAT hike via price increases (fully = 48%; partially = 17.1%) than those that are considering pay increases in FY14 (bonus increase = 13%; wage increase = 2.4%; both = 8.1%).
  2. Results from the BoJ’s 3Q13 consumer survey showed that the number of Japanese households that anticipate inflation will accelerate over the NTM (83%, up from 80.2% prior) is roughly 5x greater than those that anticipate growth will accelerate over the NTM (16.2%, down from 24.3% prior).

 

Indeed, in the absence of near-term tapering out of the Federal Reserve (an event that we believe would be bullish for the USD/bearish for the yen/bullish for the Nikkei), the pressure upon the LDP to hit a home run with Abe’s Third Arrow program and/or upon the BoJ to preemptively ease monetary policy ahead of the APR ‘14 VAT hike in order to maintain faith in the market that it is appropriately progressing towards its +2% inflation mandate is great.

 

Regarding that latter point, SEP 19 commentary from BoJ Board Member Takahide Kiuchi highlights the heightening risk of the BoJ being forced by the market to reengage in the Currency War: “The Fed’s decision [to not taper] shows how hard it is to end unconventional monetary policy. Market expectations may push the BoJ to ease further.”

 

THE PORTFOLIO MANAGER’S PLAYBOOK

All told, for the time being, the “Abenomics Trade” (i.e. short the Japanese yen/long Japanese equities) no longer has the policy support of a #StrongDollar. That means Japanese policymakers will become increasingly important in determining the performance of the trade – a marked shift from the last 3-6M of US growth expectations largely determining the performance of the USD/JPY cross.

 

From our vantage point, the following three scenarios are all probable, with each ascending scenario being roughly twice as probable as the previous one on the list:

 

  1. The SEP and/or OCT US employment and inflation data cause the Fed to commence tapering in 4Q13;
  2. Abe’s Third Arrow platform (TBD) is well-received by the market and/or the BoJ preemptively eases monetary policy in 4Q13; or
  3. Abe’s Third Arrow platform is not well-received by the market and the BoJ refrains from preemptively easing monetary policy in 4Q13.

 

As an aside, we put emphasis on "preemptive" because, at the moment, both growth data and inflation expectations are supportive of the BoJ standing pat.

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 7

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 8

 

GET TIGHT AND TRADE THE RANGES IN JAPAN - 9

 

The unique nature of each of the aforementioned scenarios is supportive of developing consternation that may contribute to rising levels of implied volatility on the USD/JPY cross and in the Japanese equity market.

 

While we certainly don’t see the Abenomics Trade as being a rearview phenomenon, we do think the unsettled nature of the catalyst calendar is likely to breed contempt in the marketplace and contribute to a widening of the associated immediate-term trading ranges on a go-forward basis.

 

Thus, investors would do well to reduce their gross exposure and/or tighten their net exposure to the Abenomics Trade for at least the next 2-3M.

 

Darius Dale

Senior Analyst


How Good Is The Fed at Forecasting?

Takeaway: You be the judge.

How Good Is The Fed at Forecasting? - ddale1

Click on image to enlarge.


MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT)

This note was originally published September 25, 2013 at 11:17 in Restaurants

Editor's note: This is a complimentary research report from Hedgeye Managing Director and Restaurants Sector Head Howard Penney. For more information on how you can sign up to receive our research please click here.

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - pen2

Clients often remind us that we’ve had a great call on MCD this year, but also prod us not to get carried away with our bearish bias.  Admittedly, this is not an easy feat – but, as the facts change, so will our call.  Our intention is always to remain flexible in our coverage.


That being said, our bearish bias has not changed.  Below we highlight four recent events and their potential implications.

  1. The stock outperformed the S&P 500 over the past month
  2. The current Mighty Wings promotion
  3. Changes in the Eurozone
  4. Personnel changes in the U.S.

Stock Price Performance – MCD is up +2.8% over the past month, outperforming the S&P 500 and its quick-service peer group by 80 bps and 200 bps, respectively.  Given that the stock had underperformed the S&P 500 by -20.9% YTD, we knew the slightest whiff of good news would push the stock higher.  So where is the good news coming from?

 

Mighty Wings – MCD hasn’t generated as much buzz around a limited-time offer (LTO) since the McRib promotion.  But, at the end of the day, it is just a LTO.  The recent buzz might create a month or so of stronger sales trends, but we don’t view this promotion as a game changer for the company.  Selling chicken wings may temporarily boost sales, but, in the long run, we fear that it will end up inflicting more harm than good.  Asking the currently disgruntled franchisee community to prepare yet another product, with a slower than normal preparation time, will only add to the service issues the company is already experiencing.  In our view, this is likely to lead to further deterioration of the MCD brand.

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - pen1

 

 

Changes in the Eurozone – MCD has been trading better since the release of August comps on September 10th.  Global trends in August were stronger due in large part to better than expected results in Europe.  The company reported Europe same-store sales growth of +3.3%, on top of +3.1% growth a year ago, as the UK, Russia, and France were strong.  Several of the MACRO indicators we monitor in Europe continue to show improvement in the region, specifically in Germany, MCD’s most important European region.  Today, the forward-looking German Consumer Confidence Indicator from the GfK Survey rose to 7.1 for October, surpassing consensus expectations.  GfK notes that, “despite a fall in income expectations, German consumers are almost euphoric when it comes to their propensity to consume.”  Investors also got some good news from Italy, another market that has given MCD considerable headaches in the past.  Today, Italy’s Consumer Confidence Index jumped to 101.1, its highest level since June 2011.

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - MCD EURO SALES

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - cons conf

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - MCD Chart4

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - germany income expect

 

 

Personnel Changes in the U.S. – Yesterday we learned that MCD’s Neil Golden plans to retire early next year.  Given the importance of MCD’s marketing message, it is clear that the company does not have its act together, particularly in its most important region, the U.S.  Despite the recent limited-time offer of Mighty Wings, McDonald’s continues to struggle in the region.

 

 

Summary

The stock is having a strong month and Europe is looking stronger, on the margin, for the company.  However, the U.S. continues to struggle and we believe it will be a while before the company returns to high-single digit EPS growth.

 

MCD: SIGNS OF LIFE? MAYBE (MAYBE NOT) - mcd chart6

 

 

 

Howard Penney

Managing Director

HPenney@hedgeye.com

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next